Why PERA Being Only 71 Percent Funded Is Not Enough
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Commentary

Why PERA Being Only 71 Percent Funded Is Not Enough

The New Mexico Public Employees Retirement Association has at least $6.1 billion in pension debt and potentially more if its current actuarial assumptions are too aggressive, which is likely.

As of 2018, the New Mexico Public Employees Retirement Association (PERA), the largest public pension system in New Mexico, reported having about $0.71 cents for every dollar it needs to fully fund pension benefits promised to municipal and county employees.

Is not being fully funded a real problem for PERA?

While New Mexico Gov. Michelle Lujan Grisham and the PERA Pension Solvency Tack Force believe it’s a serious problem to tackle, some argue that the state has enough money to pay today’s retirees and several decades to catch up on payments. However, this view fails to account for the added costs and risks associated with holding an unfunded liability and a funded ratio less than 100 percent.

1. Financing PERA pension debt is expensive.

  • PERA has at least $6.1 billion in pension debt and potentially more if its current actuarial assumptions are too aggressive, which is likely.
  • The system has annually underperformed its assumed investment return 11 times since 2001 on an actuarial basis, adding to the growth of unfunded liabilities.
  • Billions in required annual pension debt payments over time could instead be used to support other public priorities, pay public employees more or reduce the tax burden.
  • Over $1.9 billion in PERA pension debt payments have been made since 2003.

2. Maintaining a funded ratio of less than 100 percent jeopardizes intergenerational equity.

  • Any pension plan less than 100 percent funded holds pension debt that requires “unfunded liability amortization payments.”
  • Because of compounding effects, missing the assumed rate of return in any year will require supplemental contributions over several years.
  • Carrying pension debt means future taxpayers must eventually pay for today’s public sector retirement benefit.

3. The actuarial community agrees: Being 70 percent funded is not healthy.

  • The idea that a pension system less than 100 percent funded is healthy is a myth.
  • On page two of this document, you’ll find are quotes from the actuarial community on why pension plans with less than 100 cents on the dollar to pay promised benefits need to improve their long-term solvency.

Conclusion: Pension plans must be 100 percent funded to prevent expensive, intergenerational inequality. Anything less won’t do for New Mexico public employees or taxpayers.

Why PERA Being Only 71 Percent Funded Is Not Enough

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Leonard Gilroy is vice president of government reform at Reason Foundation and senior managing director of Reason's Pension Integrity Project.

Steven Gassenberger is a policy analyst with Reason Foundation's Pension Integrity Project.